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10-09: From Kyoto to Cooperation

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Climate Games: From Kyoto to Cooperation
Peter Cramton and Steven Stoft, September 7, 2010

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This paper reviews the literature on the non-cooperative equilibria of the international cap-and-trade game. Because such games can actually increase total emissions and typical polarize abatement commitments, they are unsuitable instruments for climate policy.

In the same setting where the international cap-and-trade game increases total emissions, a game to select a single global emission target induces optimal abatement. However, the use of a global quantity target is ruled out because it cannot be agreeably allocated among countries. A global price target results in a similarly cooperative outcome to a global quantity target, and there is agreement that national carbon prices should equal the global target.

Global agreement on a suitably high price target requires linking Green-Fund payments to the level of that target. This induces rich and poor countries to favor the same, nearly-optimal price. The full Green-Fund game is a three-stage repeated game. The first stage determines the Green-Fund linkage parameter. The second stage uses that parameter to influence the “votes” for the global price target.

In the third stage countries implement the price target in the context of a global market for “price credits.” A treaty is needed to implement voting rules and market rules for price credits, but it should not directly set the Green-Fund payment level or the global price target.